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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-26324
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ROCKFORD INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0075112
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1851 E. FIRST ST.
SANTA ANA, CA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 547-7166
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE COMMON
STOCK AT MAY 4, 1998 WAS 4,107,117.
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ROCKFORD INDUSTRIES, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION:
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ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets--
March 31, 1998 (unaudited) and December 31, 1997....................... 3
Consolidated Statements of Income--
Three months ended March 31, 1998 and 1997 (unaudited)................. 4
Consolidated Statements of Cash Flows--
Three months ended March 31, 1998 and 1997 (unaudited)................. 5
Notes to Consolidated Financial Statements.............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 7-8
PART II. OTHER INFORMATION............................................. 9
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SIGNATURES.............................................................. 10
2
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
------
Cash and cash equivalents............................. $ 1,495 $ 1,077
Restricted cash and cash equivalents.................. 16,529 15,590
Accounts receivable (net of allowance for doubtful
accounts of $610 at March 31, 1998 and $610 at
December 31, 1997)................................... 17,780 14,532
Prepaid expenses...................................... 1,825 1,767
Income taxes receivable............................... 2,606 2,606
Net investment in direct finance leases (net of lease
receivable and residual valuation allowance of $1,438
at March 31, 1998 and $1,445 at December 31, 1997)... 24,410 24,346
Net fixed assets...................................... 3,432 3,264
Discounted lease rentals assigned to lenders.......... 54,323 61,885
-------- --------
$122,400 $125,067
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit..................................... $ 17,805 $ 15,862
Accounts payable.................................... 11,093 8,566
Accrued expenses and other liabilities.............. 2,378 1,888
Estimated recourse obligations...................... 2,981 2,123
Deferred income taxes............................... 5,720 5,720
Nonrecourse debt.................................... 60,163 69,017
-------- --------
Total liabilities................................. 100,140 103,176
-------- --------
Commitments and contingencies
Stockholders' equity:
Series A redeemable preferred stock................. 1,575 1,575
Common stock no par value; 10,000,000 shares
authorized; 4,107,117 shares issued and outstanding
(1998 and 1997).................................... 14,045 14,045
Retained earnings................................... 6,640 6,271
-------- --------
Total stockholders' equity........................ 22,260 21,891
-------- --------
$122,400 $125,067
======== ========
See notes to financial statements
3
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT SHARES OUTSTANDING AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
--------- ---------
REVENUES:
Gain on sale of financing transactions..................... $ 2,704 $ 2,309
Finance income............................................. 947 1,129
Servicing related revenue.................................. 465 728
Other income............................................... 587 430
--------- ---------
Total revenues from operations........................... 4,703 4,596
COSTS:
Selling, general, and administrative expenses.............. 3,209 2,221
Provision for losses....................................... 307 354
Interest expense........................................... 526 621
--------- ---------
Total costs.............................................. 4,042 3,196
INCOME BEFORE INCOME TAXES................................. 661 1,400
INCOME TAXES............................................... 258 560
--------- ---------
NET INCOME................................................. $ 403 $ 840
========= =========
NET INCOME APPLICABLE TO COMMON STOCK HOLDERS.............. $ 368 $ 814
========= =========
NET INCOME PER SHARE:
Basic.................................................... $ 0.09 $ 0.20
Diluted.................................................. $ 0.09 $ 0.19
Weighted average shares outstanding
Basic.................................................... 4,107,117 4,105,517
Diluted.................................................. 4,410,663 4,414,379
See notes to financial statements
4
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 404 $ 840
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 420 156
Change in lease receivable allowance and residual
valuation allowance..................................... -- (494)
Estimated recourse obligations........................... 858 554
(Gain) loss on sale of residuals......................... 122 (148)
Gain on sale of financing transactions................... (2,801) (2,306)
Initial direct cost amortization......................... 214 330
Net amortization of deferred interest.................. (947) (838)
Changes in assets and liabilities:
Restricted cash.......................................... (939) 516
Accounts receivable, officer note receivable and prepaid
expenses................................................ (3,636) (4,251)
Income taxes receivable.................................. -- 953
Accounts payable and accrued liabilities................. 4,273 (1,951)
Income taxes payable..................................... -- 1,305
Deferred income taxes.................................... -- (1,060)
-------- --------
Net cash used in operating activities.................. (2,032) (6,394)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds sales and assignments of leases and payments
received from lessees................................... 50,036 5,703
Proceeds from sale of residuals.......................... 1,168 384
Purchase of fixed assets................................. (368) (235)
Initial direct cost capitalization....................... (2,559) (2,446)
Equipment purchased for financing........................ (47,770) (38,910)
-------- --------
Net cash provided by (used in) investing activities.... 507 (35,504)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse debt........................... -- 42,982
Proceeds from line of credit............................. 46,101 25,073
Preferred stock dividends................................ -- (26)
Payments on line of credit............................... (44,158) (28,318)
-------- --------
Net cash provided by financing activities.............. 1,943 39,711
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... 418 (2,187)
CASH AND CASH EQUIVALENTS, beginning of year............... 1,077 3,985
-------- --------
CASH AND CASH EQUIVALENTS, end of period................... $ 1,495 $ 1,798
======== ========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid.......................................... $ -- $ 273
======== ========
Interest paid.............................................. $ 526 $ 173
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES--Estimated lessee payments made directly to
nonrecourse lending institutions.......................... $ 12,347 $ 13,638
======== ========
See notes to financial statements
5
ROCKFORD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, including the accounts
of Rockford Industries, Inc. and its wholly-owned subsidiaries (the
"Company"), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. The financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K filed with
the SEC on March 31, 1998.
In the opinion of management, the consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the balance sheets as of March 31, 1998 and
December 31, 1997, the statements of income for the three month periods ended
March 31, 1998 and 1997, and the statements of cash flows for the three month
periods ended March 31, 1998 and 1997. The results of operations for the three
month period ended March 31, 1998 are not necessarily indicative of the
results of operations to be expected for the entire fiscal year ending
December 31, 1998.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No.
128"). Under SFAS No. 128, the Company is required to disclose basic earnings
per share ("EPS") and diluted EPS for all periods for which income is
presented. SFAS No. 128 requires adoption for fiscal periods ending after
December 15, 1997. The Company has adopted the provisions of SFAS No. 128
beginning with the 1997 year-end consolidated financial statements. EPS for
the period ending March 31, 1997 have been restated to conform with SFAS No.
128.
In June 1997, FASB issued SFAS No. 130. Reporting Comprehensive Income,
which is effective for annual and interim periods beginning after December 15,
1997. This statement requires all items to be recognized under accounting
standards as comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has adopted SFAS No. 130 beginning March 31, 1998. Comprehensive income for
the quarter and year to date period ending March 31, 1998 was $368,000.
Comprehensive income differs from net income by $35,000 which is attributable
to preferred stock dividends.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes
standards for the method that public entities report information about
operating segments in annual financial statements and requires enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about product and services, geographical areas and major
customers. The adoption of this standard does not have a material effect on
the Company's financial reporting.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Finance Contract Originations and Revenues. Finance contract originations
increased by approximately $8.5 million or 22% to $47.4 million in the quarter
ended March 31, 1998 from $38.9 million in the quarter ended March 31, 1997
reflecting the benefits of an expanded sales force. Total revenues for the
quarter ended March 31, 1998 were $4.7 million as compared to $4.6 million for
the quarter ended March 31, 1997. This increase is primarily due from
increased finance contract originations and gains derived from securitizations
and non recourse sales. During the quarter, the Company sold approximately
$43.2 million of finance contracts for a gain of $2.7 million compared to
$37.9 million of finance contract sales and a gain of $2.3 million in the same
quarter in 1997. Gain margins increased to 6.3% compared to 6.1% for the same
period a year ago. The improved gain margin is partially due to lower cost of
funds in the Company's securitization facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first quarter of 1998 were $3.2 million as
compared to $2.2 million in the first quarter of 1997, representing a increase
of $1.0 million or 45%. This increase was primarily due to expenses related to
the Company's expanded sales and marketing group and additional investment in
the infrastructure necessary to service and support an increasing level of
finance contract originations and the increased size of the securitized
portfolio.
Provision for Losses. Provision for losses for the quarter ending March 31,
1998 were $307,000 as compared to $354,000 for the same period a year ago,
representing a decrease of $47,000 or 13%. The Company records provision for
losses on transactions in which the past due receivable is greater than 120
days. Provision for losses on securitized deals sold later than 1996 are
netted against finance gains per SFAS No. 125. The Company believes reserves
are adequate based upon historical data and industry standards.
Interest Expense. Interest expense decreased to $526,000 for the quarter
ending March 31, 1998 from $621,000 for the quarter ending March 31, 1997.
This decrease is primarily due to principal amortization of non recourse debt.
Net Income. Income before taxes was $661,000 for the quarter ended March 31,
1998 as compared to $1,400,000 for the same quarter of the prior year. The
effective income tax rate remained consistent for the comparative periods
shown, decreasing to 39% in March of 1998 from 40% in March of 1997. Net
income was $403,000 for the quarter ended March 31, 1998 as compared to
$840,000 for the same quarter of the prior year, representing a decrease of
$437,000 or 52%. Basic net income of $.09 per share on weighted average shares
outstanding of 4,107,000 was earned during the first quarter of 1998, as
compared to basic net income of $.20 per share on weighted average shares
outstanding of 4,105,000 for the first quarter of 1997. Diluted net income of
$.09 per share on weighted average shares outstanding of 4,410,000 was earned
for the first quarter of 1998, as compared to diluted net income of $.19 per
share on weighted average shares outstanding of 4,414,000 for the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Because equipment financing is a capital intensive business, the Company
requires continual access to substantial short and long-term credit to
generate its new equipment financings and sales. The principal sources of
funding for the Company's equipment finance contracts are (i) funding obtained
from sales of asset-backed securities (backed by pools of the Company's
equipment finance contracts) to SunAmerica Life Insurance Company
("SunAmerica") and CoreStates Bank, N.A., pursuant to the terms of the each
securitization arrangement, (ii) nonrecourse borrowings from institutional
lenders, and (iii) standard recourse borrowings under its $17 million
revolving line of credit ("Revolver") used by the Company from time to time to
temporarily fund a portion of its equipment finance contracts, pending more
permanent funding arrangements for such contracts, and (iv) $7 million working
capital line of credit.
7
Cashflows. The Company's cash and cash equivalents at March 31, 1998 was
$1.5 million compared to $1.8 million at March 31, 1997. During the three
months ended March 31, 1998, the Company's cash position increased by $0.4
million, reflecting the use of cash in operations of $2.0 million and the cash
provided by investing activities of $0.5 million and from financing activities
of $1.9 million respectively. The most significant aspects of the change
during this period was from cash invested in equipment for financing of $47.8
million, increases in receivables and prepaids of $3.6 million, increases in
accounts payable and accrued liabilities of $4.3 million and proceeds from
sales and assignments of leases and payments received from lessees of
$50.0 million. This was largely due to the higher level of the Company's
finance contract originations. In comparison, the Company's cash position
decreased by $2.2 million during the three months ended March 31, 1997,
reflecting the use of cash in operations and investing activities of $6.4
million and $35.5 million, respectively, and the cash provided from financing
activities of $39.7 million. The change in cash was primarily due to cash used
to purchase equipment for financing of $38.9 million, increase in receivables
and prepaids of $4.3 million and proceeds from nonrecourse debt borrowings of
$43.0 million, proceeds from sales and assignments of leases and payments from
lessees of $5.7 million.
The Company believes that existing cash balances, cash flows from
activities, proceeds from securitization arrangements, nonrecourse
assignments, and bank credit lines will be sufficient to meet its financing
needs for the next twelve months.
IMPACT OF INFLATION
The Company funds a majority of its equipment finance contracts with fixed
rate loans in order to maintain a spread between the interest rates charged to
the Company and those implicit in the financing the Company provides. Due to
this timely matching of finance contract yields with funding rates, the
Company generally has mitigated the effects of rising interest rates during
inflationary periods. General inflation in the economy has driven upward the
operating expenses of many businesses, and accordingly, the Company has
increased salaries and borne higher prices for most other goods and services.
The Company continuously seeks methods of reducing costs and streamlining
operations while maximizing efficiencies and internal operating controls
through development of cost reducing funding mechanisms, such as the
securitization program, and through systems automation and enhancement. While
the Company is subject to inflation as described above, the Company believes
that inflation does not have a material effect on its operating results.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--Not Applicable
Item 2. Changes in Securities--Not Applicable
Item 3. Defaults Upon Senior Securities--Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27--Financial Data Schedule
(b) Reports on Form 8-K;
No reports were filed on form 8-K during the quarter for which this
report is filed.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKFORD INDUSTRIES, INC.
(Registrant)
Date: May 13, 1998 /s/ Gerry J. Ricco
_____________________________________
Gerry J. Ricco
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 13, 1998
/s/ Kevin McDonnell
_____________________________________
Kevin McDonnell
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
10